Doug Mitchell, CLU
First Things First
Ogletree Financial Services, LLC
Every physician who opens a practice either on their own or with partners has invested significant time, money, and sweat to get there and finally realize their vision and get their doors open. The debts are substantial but manageable and over time, if you grow your patient list, you'll understand that it was all worth every dime and every minute.
This article is for those physicians with a brand new practice. Here, we’ll discuss managing your everyday financial risks and explain the insurance products that will be necessary to mitigate your risk and implement a legitimate business continuation plan. After all, once you’re licensed to practice, getting to this point is all about the money and you are going to need financial protection every step of the way.
Before going any further, let's try and understand how your insurance needs will be different depending on whether you will be practicing as a solo practitioner or a partnership primarily due to the buy-sell agreement that needs to be in place on day one. This agreement simply lays out the strategy for how the practice (surviving partners) will purchase his or her shares from the estate or heirs.
Whether you are a solo practice owner or the practice is owned by a partnership, each physician will need the personal life insurance coverage according to his or her needs. But in every case where there is a partnership, an additional step must be taken to financially protect surviving partners when one of the group passes away.
Three categories of risk that must be addressed for a single owner or each partner in a partnership are:
- Debt (personal and business)
- Income Protection for surviving loved ones
- Buy-Sell Agreement funding for a partnership
The good news here is that one or two insurance policies can provide the financial protection needed for all the risks addressed above. With several options for life insurance available, you will need to discuss your objectives with a professional. For most new practices, 20 year term
is a common option. Each applicant will take the necessary steps to determine how much debt must be covered and the amount needed for the surviving family income replacement. The insurance policy required to fund the Buy-Sell agreement is determined by the terms and conditions stated in the agreement.
It is also very important to know what rate class you will qualify for. The rate class will determine what your annual premium is. If you are in perfect health and don’t smoke
, your rates will be low. If on the other hand you have health issues such as diabetes, heart disease, sleep apnea
, or obesity, your rates will be higher.
Insuring Your Debt
There’s no doubt that while you were going to school and then starting your practice you accumulated significant debt that needs to be paid by the proceeds of your insurance policy. Whatever that amount may be, it’s likely to increase as you open your new practice because of the cost of equipment, supplies, and electronics that are typical for your specialty.
We know from statistics published by the American Medical School Association
that the new physician is likely to be facing about $190,000
in student debt right out of the gate. We can also estimate the cost of a new practice if we refer to David J. Zetter, a consultant and member of the National Society of Certified Healthcare Business Consultants
. Mr. Zetter believes that a new practice will likely cost about $100,000
in startup costs and that the new practitioner will need an additional $100,000
line of credit to deal with first-year operational costs such as payroll and other expenses. With the total being just shy of $500,000
, it appears like a lot of debt to manage but thankfully it’s not a lot of debt to insure.
The income replacement part of your financial program takes a little more thought but there are some easy ways to calculate what you’ll need to insure for. The amount that needs to be determined is the amount of money your surviving loved ones will need to replace your income for X number of years. In the insurance industry, this is referred to as a financial needs analysis.
Fortunately, there are free online calculators
that will take you through a series of questions to determine how much life insurance you will need so that your family can continue living comfortably. Using a financial needs analysis calculator, you can determine your surviving loved ones’ immediate cash needs, their long-term income needs, and then reduce that amount by available resources. Other calculators will help you determine how much the life insurance will cost
The needs analysis will take into consideration some or all of the following financial needs for your surviving loved ones:
How Much You Can Expect to Pay for Financial Protection
- Monthly living expenses for a period of time you select
- Personal debt and an outstanding mortgage balance
- Income replacement for the cost of college tuition
- Income replacement for retirement planning
- Financial legacy for heirs
- Final expenses (funeral and burial costs and unpaid medical expenses)
The great news about the above-mentioned financial needs is that all of them are temporary and therefore you can buy temporary insurance which is very affordable to cover every need. By purchasing Term Insurance from a highly-rated insurance carrier, a physician opening a new practice can purchase enough life insurance to cover student loan debt, business startup costs, and replacement income for surviving loved ones for less than it costs to dine out with your family at a nice restaurant.
Here are some actual quotes for a $1,500,000 Term Insurance policy for a healthy male or female non-smoker:
If anything, these sample quotes should allay your concerns regarding how you are going to insure your mountain of debt and how that would fit in your budget as a new business owner.
Don’t Forget Your Buy-Sell Agreement
Any time a partnership is formed, whether there are 2 or 20 partners, a buy-sell agreement should be implemented to assure the continuation of the business if a partner should die unexpectedly.
offers a simple description of a buy-sell agreement as follows:
A buy and sell agreement is a legally binding agreement used to reallocate a share of a business if an owner dies or leaves the business. Also known as a "buy-sell agreement," a "buyout agreement," a "business will" or a "business prenup," buy and sell agreements are used by sole proprietorships, partnerships and closed corporations to divide the business share or interest of a proprietor, partner or shareholder.
The steps for creating a buy-sell agreement are rather simple and more importantly, funding the agreement with Term Life Insurance is very affordable for the partnership. In simple terms, the agreement takes the following steps:
1. Determines the total value of the practice and divides the value by the number of partners
2. The practice purchases an insurance policy on each partner in the amount of their share and is the owner and Payor of the policy.
3. If or when a partner dies, the practice (partnership) would receive the death benefit and use it to buy back the shares of the practice from the partner’s heirs.
4. The shares are then divided among the surviving partners and the partnership is made whole.
Although an insurance professional will be utilized to purchase the life insurance that will fund the buy-sell agreement, the practice should seek professional help from a CPA to set up the agreement to ensure continuation of the partnership in the event a partner(s) passes away.